Loonieviews October 27, 2014

QE3 cruises into sunset

Michael O’Neill

FX Consultant / IFXA Ltd



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  • QE3 cruising into sunset
  • USDX suggests short-term FX consolidation
  • Soft WTI will support USDCAD

By Michael O’Neill

The final week of October has kicked off with German businesses a tad more pessimistic on the economic outlook, a lot less stress from the European Central Bank (ECB) stress tests and a new government in Brazil (which is the same as the old government). The voters may have been happy re-electing the incumbent president, Dilma Rousseff, but markets weren’t. BRL dropped 2.6% while Brazilian equities were down 5%. The focus for the week is on the Federal Open Market Committee (FOMC) meeting on Wednesday but the bar is set pretty low on the expectations front, which may allow the Reserve Bank of New Zealand’s (RBNZ) interest rate announcement and statement to hog the spotlight, later that day.

QE3 cruising into sunset at Port FOMC

The Federal Reserve Open Market Committee (FOMC) minutes of the September 17 meeting announced the end of the Quantitative Easing programme, dubbed QE3. That will be confirmed on Wednesday. The rest of the FOMC statement is widely expected to be a near duplicate of the September release.

Lurking in the weeds is a small camp that has jumped all over St Louis Fed president James Bullard’s suggestion that the Fed could consider a pause in its taper programme due to sliding inflation. That seems unlikely as it would destabilise financial markets, impinge on the FOMC’s credibility and expose it to widespread criticism about its motives and the strength and quality of the FOMC member’s economic outlook and assessments.

Stress test just beauty contest

The FX markets started the week with a sigh of relief. The highly-anticipated release of the European Central Bank’s (ECB) stress test on 130 European banks found only 25 banks with capital shortfalls and most of them had already addressed the issue by the time the report was issued.

Was there really any doubt? The Eurozone economy is teetering on the edge of recession and the ECB president Mario Draghi and his colleagues are contemplating extreme measures to jump-start economic growth. A cynic could be forgiven for concluding that the results and timing of the release of the Stress test is merely stimulus in the form of propaganda. If so, it has worked, so far.

FX in consolidation mode says USDX

The intraday USDX technicals are bearish while trading below 86.07 but support at 85.50 and 85.15 (the mid-August uptrend line) may contain weakness. The short term uptrend from July remains intact above 84.30 and will accelerate on a break of resistance at 86.10.

Chart: USDX Daily

Source: Saxo Bank

Sliding oil prices undermine Loonie

USDCAD will struggle to make gains while WTI oil prices continue to slide. Oil is in a steep and well-defined downtrend with a break of support in the 79.60 level suggesting further weakness to 77.50, a level last seen in July 2012. Only a recovery above 84.05 will negate the downward pressure. In addition, natural gas prices (a key Canadian export) are sliding as well, providing a one-two punch to USDCAD bears.

Chart: WTI Oil and USDCAD

Source: Saxo Bank

Chart: Natural Gas and USDCAD

Source: Saxo Bank

Key US data releases

Tuesday: September Durable Goods (Forecast 0.6%, ex-transportation 0.5%, month-over-month) The huge swings over the past couple of series will diminish the impact of this month’s release on the US dollar. At the same time, a better-than-expected gains will give the US dollar some support on an improving economic outlook.

Tuesday: Conference Board Consumer Confidence Survey (Forecast, 87). The expected gain may be lost in the fog ahead of Wednesday’s FOMC meeting.

Wednesday: FOMC rate decision and statement.

Thursday: US Real GDP Q3 (Forecast 3.0%, quarter-over-quarter). A better-than-expected print will give the US dollar a boost on interest rate hike timing revisions, especially after the official end of the tapering programme.

Friday: September Personal Income and Expenditures (PCE) (Forecast Income 0.3%, Spending 0.1% month-over-month).

Key Canadian data releases

Friday: Real GDP- August (Forecast 0.1%). The risk is that this data disappoints, which will undermine the Loonie.

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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